Protection, import restrictions aren't sweet for sugar

Protection, import restrictions aren't sweet for sugar

Ari A. Perdana, Centre for Strategic and International Studies (CSIS),
Jakarta, Ari_Perdana@csis.or.id

In the past few months, even years, sugar has not been as
sweet as it tastes. The word "sugar" is almost synonymous with
"rent-seeking activities" on the one hand, and "controversy" on
the other hand.

Last year, the influx of cheap imported sugar triggered
protests from local sugarcane farmers and sugar producers.
Politicians and bureaucrats then argued that the root of the
problem was the low import tariff imposed on sugar.

However, it is a fallacious logic to believe that free trade
on sugar is the root of the problem, and it is also fallacious to
consider a high import tariff on sugar a solution. Until last
year, the tariff imposed on imported sugar was still around 20
percent to 25 percent.

In addition, the weakening value of the rupiah since the
crisis has also provided extra protection for local sugar. If
local sugar is still uncompetitive in the domestic market, the
only logical explanation is inefficiency and low productivity.

There are several reasons for the inefficiency and low
productivity in the domestic sugar industry and sugarcane
farming. Some of these are the quality of land, the obsolete
technology applied in the farming industry and high labor costs,
as well as factors related to market structure. All these have
resulted in the inability of the domestic sugar industry to
produce commodities of a higher quality and lower price, compared
to imported sugar.

The inability of domestic sugar to compete with foreign
competitors has often been linked to two other possible causes:
Dumping practices by sugar producers of other countries and
illegal imports. While dumping practices may be a probable cause,
especially given the excess supply of sugar in the international
market, it does not provide enough reasons for domestic sugar to
be outcompeted.

The counterargument is very simple: Indonesia has an excessive
demand for sugar. Last year's data shows that domestic
consumption of sugar reached between 3 million tons to 3.2
million tons.

Of this demand, the domestic industry could only supply 1.7
tons annually, which means there is an excess demand of 1.3
million tons to 1.5 million tons. Compared with the total excess
supply in the world market of between 0.5 million tons to 1.5
million tons, the local market in Indonesia is large enough to
absorb the excess worldwide supply without other producers
resorting to dumping.

As for illegal imports, while it is true that they are among
the biggest problems faced by the domestic business sector -- not
only the sugar industry -- the question is, how did illegally
imported sugar enter the local market?

Apart from the chronic, but classical, problem of a dirty
bureaucracy, standard economic theory says that a black market
tends to arise every time competitive and regulated prices have
reached parity. In this case, the import tariff raises the
domestic market price higher than the overseas price, and hence
provides an incentive for illegal traders.

The greater the price difference, the more incentives there
are. As long as there are no improvements in the bureaucracy and
law enforcement, raising the tariff or imposing trade barriers
will only encourage more smuggling and give rise to more black
markets, rather than solving the problems.

In responding to last year's sugar price crisis, the
government decided to apply the restricted import policy on
sugar. Around a decade ago, a similar policy imposed on cloves
and oranges had successfully damaged the local economy.

The situation is not much different this time. A few months
after the policy had been implemented, sugar had almost
disappeared from the market, pushing up its price to more than Rp
5,000 per kilogram, and even Rp 6,000 per kilogram in some areas,
which was about a 50 percent increase in price.

We read that late import orders, slow procedures and bad
distribution channels, etc. are to blame for the disappearance of
sugar from the market. All of these circumstances, however, only
reveal that the economic rent in the sugar industry is very high,
which subsequently tempts involved parties to take every chance
to try and extract the rent. The sugar crisis also confirms a
preposition in standard economic textbooks: A market mechanism
may not always work, but a government (or policy) failure
inflicts more damage to the economy.

Why not apply market mechanism -- including free international
and domestic trade -- in the sugar industry? The popular argument
against market mechanism is that the farmers would lose out in
the free competition. However, we have seen that protection and a
restricted import policy have failed to secure farmers' welfare.

In the current economic structure, the farmers' bargaining
position against sugar factories is too low. At the same time,
such a system increases price, thereby lowering consumers' buying
power. Protection and anti-market policies only benefit rent-
seekers -- capital owners in the inefficient and unproductive
sugar industry, related importers and domestic distributors.

To save the domestic sugar industry without sacrificing the
sugarcane farmers and consumers, there is no quick-fix policy.
The only option is to increase productivity and improve
efficiency. This also implies that factories that are unable to
improve their productivity and efficiency should be allowed to
follow the natural law of the market: Closure. If they are forced
to survive, the social cost to the economy will be high.

Policies to protect farmers should also aim to improve
farmers' productivity and efficiency. The economic structure that
has been inherited from the colonial era should also be revised.
Farmers should be given more flexibility in choosing which
commodities they plant. Hence, they will not be dependent upon
only one commodity, which, in the end, lowers their bargaining
position.

Meanwhile, the market for sugar should be released into the
market mechanism, meaning that the current sugar policy should be
scrapped and imports freed. Government intervention should be
focused on law enforcement, especially in dealing with illegal
imports, and on improving distribution channels.

Under conditions in which the government is weak and the
bureaucracy corrupt, policies that distort the market mechanism
will only bring more damage. On the other hand, a market
mechanism may not be the perfect solution. But in this case, the
cost to the economy will be lower.